We all understand the idea of paying too much for a small business. But is there such a thing as not paying enough? That seems like an odd notion, but I'm familiar with situations in which a buyer acquired a small business for a figure substantially under what probably was market value.
Yes there are instances when a seller will agree to let a buyer take over the business for a figure well below what most buyers would have been willing to pay. Usually the circumstances include an extremely motivated seller and a buyer who's there at the "right" time, and aware of the seller's eagerness to get out of the business.
I'm an advocate for what we call the "win-win" transaction, with both parties getting what they want; not one party taking advantage of the other. I've noticed that a deal involving a purchaser who purposely takes advantage of a "desperate" seller, does not always end well for that buyer. Maybe it's because of bad Karma or a short-sighted business strategy.
The purchaser of a service business had his all cash offer accepted although the price was about half of what the seller was asking. The owner of the business felt he needed to move immediately to another state to take care of his ailing mother, as she needed care and was unable to move to him.
Many of the seller's customers were sorry to see him leaving the business. When word got out that the new owner had taken advantage of the seller, they stopped doing business with the company. Within a few months, the business no longer generated a profit and the buyer came to realize that his deal wasn’t the bargain he’d expected.
And the seller of a retail store was in a hurry to find a buyer because of his quickly deteriorating health. His wife's insistence on getting out of the business, even if he had to "give it away," prompted him to accept the first offer. It was at a price about two-thirds of what he was asking, and was highly leveraged, with the seller taking most of the payment in the form of a promissory note. A few weeks after the close of escrow, the seller's wife became his widow, and soon after that she realized that the buyer was neglecting to make required monthly payments of principal and interest on the seller’s carry-back note. It was money she was counting on to live.
She explained her predicament to a business attorney. And once the lawyer learned about the circumstances of the sale, and examined the language of the note, she notified the buyer he was technically in default, and the total sum of the note was now due and payable. He was given 15 days to pay off the note in full or face a court action in which the widow would ask that the business assets be seized and sold. Any shortfall between the money raised by the sale and the full sum due the widow, including reimbursing her for legal expenses, would be the responsibility of the buyer. That might include, if necessary, the court requiring him to sell personal assets to raise the required sum.
The buyer was able to get a quick loan to pay off the widow and avoid her legal action. But the loan came with a high rate of interest and the borrower's risk of losing his home if it was not paid off exactly as he'd agreed.
Perhaps some of my colleagues will have a different idea about whether it's possible to pay too little for a small business. I've noticed the buyer able to achieve such a deal may come to regret it.